“I wouldn't be surprised to see foreclosures increase as the economy slows down. The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes.” -Rick Sharga, RealtyTrac

While this isn’t anything new, the percentages continue to amaze… and I fully expect them to get much much worse.

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most since records began in January 2005, the Irvine, California-based seller of default data said in a statement today. Filings rose 3 percent from the second quarter and fell 12 percent in September from August as state laws created to keep people in homes slowed the pace of defaults.”

To keep an eye on the foreclosure trend I drop by the Countrywide Foreclosures Blog at least a couple times a month. The above chart is from that site. The site lists the homes for sale on the Countrywide Financial website. If anything, these numbers are on the low side as the company is probably under reporting and both unwilling and unable to keep pace with the foreclosure rate.

On the S&P 500 (SPX) the intraday low at 865.83 was significantly better than the previous intraday low at 839.80. The closing lows were also higher. Yesterday's lows around 875.81 must hold or the market becomes vulnerable to a sudden implosion to new lows.

For the S&P 500 (SPX) to remain in the Symmetrical Triangle on the 5 day 60 minute chart, prices must go up today. There is no margin for error. A down day would result in a break DOWN and OUT of the Triangle... and result in new market lows.

Volatility (VIX) appears to have maxed out for now. Everything above 70.00 consists of an intraday 'selling tail' on the candles, suggesting that a move higher is less and less likely. These levels would appear to be unsustainable, 10% intraday ranges in the S&P 500 will tire even the best traders. Expect VIX to drift lower as the credit markets improve and equities catch a nice bid as some of the sidelined money looks for bargains.

For the month of October at least, the TED Spread is heading in the right direction. On Friday the TED spread really improved. This week will be critical because significant follow thru is required.

1 month LIBOR (black, red line) has clearly peaked at 4.59%. Although LIBOR is now so discredited as to be purely symbolic, continued improvement is required for equities to find a sustainable bid.

The 3 month T-Bill is moving in the right direction now yielding over 1%, up from almost ZERO just a few weeks ago.

Wednesday, October 22, 2008

“We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is.” –Ben Bernanke, October 7th, 2008.

I love the above quote. Very confidence inspiring.

Go Bernanke! Experiment away. What could possibly go wrong?

Anywho…

The Fed raised the rate it pays banks for the excess cash they keep on deposit at the Fed. This should further affect the Reserve Balance with Federal Reserve Banks (WRESBAL) chart going forward as scared and fidgety financial institutions ‘park’ the cash they’re hoarding over at the Fed.

This is actually productive, because the Fed will turn right around and force feed that same cash right back into the system via the various emergency facilities.

The attempt is of course to keep credit flowing and the velocity of money from collapsing. This of course is all part of the desperate battle to prevent MASS DEFLATION. It won't work of course, but it sure will be one wild ride.

Fed officials acted after the initial rate they set Oct. 6 failed to keep the benchmark U.S. overnight interest rate close to the target set by policy makers. The central bank will pay interest on excess reserves at the lowest target rate for a one- or two-week period less 0.35 percentage point, effective tomorrow, the Fed said in a statement.

The previous rate was 0.75 percentage point below the target. Chairman Ben S. Bernanke wants to ensure that his efforts to flood the financial system with cash don't interfere with the policy rate. The Fed started paying interest on reserves this month after gaining authorization under the financial-rescue bill passed by Congress.”

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses following the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.”

Why the desperate move? Why do money market funds matter so much?

“U.S. money-market mutual funds held more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset- backed commercial paper at the beginning of September, according to Alex Roever, a New York-based analyst at JPMorgan.”

Without liquid money market funds, companies won’t find willing buyers for their unsecured commercial paper and asset backed commercial paper. Companies that are unable to sell such paper may suddenly find themselves in a terrible liquidity crunch with receivables incoming, but too far out and unavoidable expenses such as payroll pending.

So how many different “facilities” does the Fed now employ?

(Want to know more? Click on “WTF?” beside each facility. Surprised? Confused? Angry? Click on “FAQ” beside each facility and have all your questions answered.)

As you can imagine, all these facilities have made the Fed charts go from just scary, to crazy scary. To be honest, the worst charts are still to come because the month of October was the scariest and craziest to date, with the Fed intervening almost daily.

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) continue to plummet. This makes sense as under capitalized banks continue to hemorrhage money via outright losses and write downs of over valued assets. The result is that these banks now have to borrow money from the Fed to maintain their reserves so that when you go to the ATM money actually comes out…

This also explains why all interbank lending rates from LIBOR and EURIBOR to HIBOR all did moonshots. You see, there were few banks capable of lending in any size, and even fewer willing.

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) is the obviously the opposite of BOGNONBR. The numbers are pretty close, plus or minus a couple of billion. Therefore, the borrowed money is clearly flowing straight into the banks where it is desperately needed to keep them liquid.

The BORROWvBOGNONBR chart illustrates the relationship on a single chart.

On top of that, Discount Window Borrowings of Depository Institutions from the Federal Reserve (DISCBORR) have only just recently spiked hard. Discount window borrowings are rapidly approaching $150 billion, despite holding steady at low levels throughout most of the crisis. Clearly, things are getting worse.

The Term Auction Credit (TERMAUC) facility has been capped at $150 billion since June. With nowhere else to turn, desperate banks may be turning to the discount window (DISCBORR). Just a theory…

Adding it all up (or as much of it as the Fed wants you to be able to add up) Total Borrowings of Depository Institutions from the Federal Reserve (TOTBORR) is about $450 billion. Put in context, the IMF, World Bank and CIA World Factbook list US GDP at about $13.8 trillion. That means, total borrowings stand at about 3% of GDP.

Don’t even worry about it though. The gubbermint has got everything under control…The banks don’t trust each and rightly so. Each bank has marked their own toxic assets to fantasy and know full well all the others have done the same. Each bank knows they’ve overextended and over leveraged themselves during the credit bubble and know full well all the others have done the same.

With the passage of TARP came a small provision that allows the Fed to pay interest on deposits. So these scared banks have plowed back into the Fed banks all the cash they’ve been hoarding as can be seen by Reserve Balances with Federal Reserve Banks (WRESBAL)

Tuesday, October 21, 2008

This would go a long way towards adding desperately needed and sought transparency to the derivatives market. This would also almost completely eliminate counterparty risk, which has now become the number one problem.

The downside risk of course is that these products and positions will then see the light of day, where they very well may turn out to be quite ugly.

I still expect Credit Default Swaps (CDS) to blaze a wide, unpredictable path of destruction thru both the financial system and the real economy. (Like the guy in the picture.) But in the meantime, this is progress. This is good.

Fed officials and New York's insurance regulator have been pressing the $55 trillion market to create a central counterparty after Lehman Brothers Holdings Inc.'s bankruptcy last month. Because swap contracts are traded bilaterally between banks, hedge funds, insurers and other institutional investors, default by a major dealer threatens market stability by risking losses at everybody they've traded with.

While “progress has occurred at a slower-than-desirable pace, recent events have accelerated the rollout,” New York- based Barclays credit strategists Bradley Rogoff and Gautam Kakodkar wrote in a note to clients dated Oct. 17. “Expected go- live date is late October or early November.”

Four groups have been vying to operate clearing operations, including a partnership between Chicago-based CME Group Inc. and Citadel Investment Group LLC and a group that includes dealer- owned Clearing Corp., Intercontinental Exchange Inc. and credit swap index owner Markit Group Ltd. Eurex and NYSE Euronext have also submitted proposals.”

The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers' Association said. That's the lowest level since Sept. 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve's target for the first time since Oct. 3.”

Lahde, head of Santa Monica, California-based Lahde Capital Management LLC, told investors last month he was returning their cash because the risk of using credit derivatives -- his means of betting on the falling value of bonds and loans, including subprime mortgages -- was too risky given the weakness of the banks he was trading with.

“I was in this game for money,” Lahde, 37, wrote in a two-page letter today in which he said he had come to hate the hedge-fund business. “The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government.

“All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God Bless America.”

Lahde, who managed about $80 million, told clients he'll be content to invest his own money, rather than taking cash from wealthy individuals and institutions and trying to amass a fortune worth hundreds of millions or even billions of dollars.

“I do not understand the legacy thing,'' he wrote. “Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.''

Request for Soros

He said he'd spend his time repairing his health “as well as my entire life -- where I had to compete for spaces at universities, and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not.”

He also suggested that billionaire George Soros sponsor a forum in which “great minds” would come together to create a new system of government, as the current system “is clearly broken.”

Lahde ended his letter with a plea for the increased use of hemp as an alternative source of food and energy that segued into a call for the legalization of marijuana.

“Hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products,” he wrote. “Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term.”

`Innocuous Plant'

He added, “The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country.”

Lahde said the only reason marijuana remains illegal is because “Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other addictive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers.''

Lahde graduated from Michigan State University with a degree in finance and holds an MBA from the University of California, Los Angeles. He worked at Los Angeles-based hedge fund Dalton Investments LLC before founding his own firm two years ago with about $10 million.

Lahde wasn't available for comment. A woman at his firm, who asked not to be identified, confirmed the authenticity of the letter.”

“The policies put in place by authorities around the world have clearly reduced the risk of more bank defaults, and that's beginning to loosen up monetary conditions. I expect interbank rates to continue to gradually decline over the coming weeks as central banks flood the market with cash.” -Nick Stamenkovic, RIA Capital Markets

The London interbank offered rate, or Libor, for three-month loans in U.S. dollars slid 36 basis points to 4.06 percent today, the biggest drop in nine months, according to the British Bankers' Association. The overnight-dollar rate lost 16 basis points to 1.51 percent, the lowest level in more than four years. The three- month rate for euros dropped. The Libor-OIS spread, a measure of cash availability, fell below 300 basis points for the first time in almost two weeks.”

Last week, the first tentative signs of improvement became evident. This week then is off to a good start.

“The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was 137 basis points lower today than on Oct. 10, when it reached the highest since Bloomberg began tracking the data in 1984.”

Watch this yield. A clear sign of stabilization and flows back into 'risky assets' (equities) would occur only with this rising towards 1.50% and becoming more orderly.

For the month of October at least, the TED Spread is heading in the right direction. On Friday the TED spread really improved. This week will be critical because significant follow thru is required.

1 month LIBOR (black, red line) has clearly peaked at 4.59%. Although LIBOR is now so discredited as to be purely symbolic, continued improvement is required for equities to find a sustainable bid.

The Eurodollar front month is moving in the right direction, having moved up from a low of 96.250 to Friday's close of 97.480. The Eurodollar contract settles to LIBOR upon expiration and is therefore a good indication of where traders expect LIBOR to be going forward.

Watching the Eurodollar intraday can give you an idea of whether or not to expect an improvement in LIBOR next day.

Volatility (VIX) appears to have maxed out for now. Everything above 70.00 consists of an intraday 'selling tail' on the candles, suggesting that a move higher is less and less likely. These levels would appear to be unsustainable, 10% intraday ranges in the S&P 500 will tire even the best traders. Expect VIX to drift lower as the credit markets improve and equities catch a nice bid as some of the sidelined money looks for bargains.

On the S&P 500 (SPX) the intraday low at 865.83 was significantly better than the previous intraday low at 839.80. The closing lows were also higher. The last two days of down volume (red bars) were significantly lower than the recent 'average', despite the fact that they were large, important candles. Therefore, expect prices to move sharply higher after a brief period of consolidation.

Disclaimer

The Financial Ninja is a collection of my thoughts and opinions about current economic and market conditions. These are not buy and sell recommendations. Use your head and do your own research. This is a forum to stimulate discussion and debate.

About Me

I started trading during the tech bubble when I was still in high school. My trading has financed my education and I have since completed a BA in Economics and an MBA with a concentration in Finance. I have worked as both a proprietary equity and fixed income derivatives trader.